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May 23, 2018

Fed Minutes Might Not Stop the Bond Selloff - May 23, 2018 - The Wall Street Journal | Money Beat

The Wall Street Journal
MoneyBeat

Fed Minutes Might Not Stop the Bond Selloff

By Akane Otani
Morning MoneyBeat is the Journal’s pre-market primer. To receive the newsletter via email, click here.
Market Snap at 05/23/2018 07:46:21 AM ET
S&P 500 Futures -0.59%
2710
DJIA Futures -0.71%
24668
U.S. 10 Year 14/32
3.014%
WSJ Dollar Index 0.31%
87.36
Crude Oil -0.21%
$72.09
Gold 0.32%
$1301.50
Europe
Asia
FTSE 100 -0.59%
Nikkei 225 -1.18%
DAX -1.44%
Hang Seng -1.82%
CAC 40 -1.1%
Shanghai -1.41%

Overnight Developments

  • Global stocks declined amid lingering trade tensions and a drop in commodity prices. S&P 500 futures pointed to an opening fall of 0.6%.
  • The Stoxx Europe 600 was recently down by 0.9%.
  • Earlier, Asian stocks mostly fell, with Japan’s Nikkei down by 1.2% amid a steep climb in the yen. Hong Kong’s Hang Seng dropped 1.8% and Shanghai stocks fell 1.4%.
  • The Breakfast Briefing

    Investors aren’t feeling too hot on government bonds ahead of Wednesday's release of minutes from the Federal Reserve’s May policy meeting.
    After making several unsuccessful runs at 3% earlier in the year, the yield on the benchmark 10-year U.S. Treasury note--used as a reference for everything from mortgages to student debt--has closed above the level six trading days in a row.
    That’s the longest such streak for the 10-year note since the period through July 8, 2011, according to the WSJ Market Data Group, and a sign to many analysts that the latest bout of selling in the bond market could be here to stay.
    “It took three months since breaking 2.90% to decisively take out 3%. And now that that’s occurred--we’re seeing a bit of a shift,” said Bill Merz, head of fixed-income research at U.S. Bank Wealth Management.
    Investors point to a number of factors behind the jump in bond yields. Over the last month, data on retail sales and industrial production have reassured investors that the U.S. economy continues to grow at a slow and steady pace. The Treasury Department has been ramping up its sale of government debt to help finance a pickup in federal spending.
    And then there have likely been some technical factors to blame too, with analysts noting bond selling accelerated last week once the yield on the 10-year note crossed certain levels.
    What could stop the selling? One wild card could be the Federal Reserve, which releases minutes from its May meeting later Wednesday. “The recent rise in yields could go into reverse if the Fed provides reassurance that officials are not becoming more concerned about the threat of rising inflation,” UBS Wealth Management analysts wrote in a note.
    Fed officials appeared to give some indication of that at the end of their May meeting, when they released a statement describing their 2% inflation goal as “symmetric”--which some analysts interpreted as meaning the Fed could allow inflation to overshoot 2% without then picking up its pace of interest-rate increases.
    Yet investors aren’t counting on that being the case. Federal-funds futures, used by traders to place bets on the course of interest rates, show market-implied probabilities of a fourth rate hike in 2018 have only climbed since the start of the month.
    “The economic backdrop warrants the 10-year Treasury north of 3%,” Mr. Merz said, adding that, in his view, “the longer we remain above 3%, the harder it gets to go back.”
    What will the Fed minutes show?  Let the author know your thoughts at akane.otani@wsj.com.

    Daily Factoid

    On this day in 1934, Bonnie Parker and Clyde Barrow were shot to death by Texas and Louisiana state police while driving a stolen car after a string of crimes.

    Key Events

    IHS Markit’s composite purchasing managers index, to be released at 9:45 a.m. ET, is expected to show manufacturing remained steady in May, while activity in the services sector edged higher.
    New home sales are expected to pull back to an annualized rate of 677,000 in April after surging to 694,000 in the prior month. The data are out at 10 a.m. ET.
    The 10:30 a.m. release of the EIA petroleum status report is expected to show U.S. oil inventories decreased by 2.2 million barrels, on average, in the week ended May 18.
    At 2 p.m., the Federal Reserve will release minutes from its May meeting, where it left rates on hold but indicated it remains on track to raise them in June.
    Minneapolis Fed President Neel Kashkari will speak at 2:15 p.m. ET.

    Stocks to Watch

    Red Robin Gourmet Burgers—Down 16.5%: The burger chain posted weaker-than-expected profits for its first quarter and also missed on sales.
    Hewlett Packard Enterprise—Up 0.2%: The maker of storage and networking devices raised its full-year profit forecast after topping sales and earnings expectations in the most recent quarter.
    Intuit—Down 0.3%: Intuit said sales rose 15% in the most recent quarter from a year earlier, a larger-than-expected rise, and the parent of Turbo Tax boosted its full-year targets.
    MetLife—Down 0.3%: MetLife said its board has approved a new $1.5 billion share buyback program for the insurance giant.

    Number of the Day

    200,000
    Venezuelan's crude output has dropped by 200,000 barrels a day this year, posing a risk to global oil supply.

    Must Reads

    Lowe’s and Tiffany report financial results today. Investors will be eyeing Lowe’s for updates after J.C. Penney CEO Marvin Ellison announced Tuesday that he would quit his job to take over leadership at Lowe’s.
    The House approved a bipartisan bill easing Dodd-Frank rules for small and midsize banks. The legislation now goes to President Donald Trump for his signature. The story of how the legislation came together demonstrates how policy makers scaled back their priorities for a compromise.
    Standard models of the economy are built on a simple relationship: When unemployment goes down, inflation eventually goes up. That relationship has looked sickly for years. In Japan, it may be dead, a preview of what central bankers could confront everywhere, the Journal’s chief economics commentator Greg Ip writes.
    Congressional opposition is mounting over the White House approach to Chinese tech deals, and U.S. lawmakers are moving to thwart Trump administration efforts to ease restrictions on China’s ZTE.
    SoftBank Group said it had agreed to sell its entire stake in India’s Flipkart Group to Walmart.